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South Carolina
JUDICIAL DEPARTMENT
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2013-01-17-01
STATE OF SOUTH CAROLINA   IN THE COURT OF COMMON PLEAS
     
COUNTY OF CHARLESTON  

FOR THE NINTH JUDICIAL CIRCUIT

     

   
THE ESTATE OF JACQUELIN K.  )  
STEVENSON, by and through its Co- )  
Personal Representatives, Jacquelin )  
S. Bennett and Kathleen S. Turner     )  
Derivatively On Behalf Of Nominal  )  
Defendant FORCE PROTECTION, )  
INC., )  
Plaintiffs, )  
v. )

 

  ) Civil Action No. 08-CP-10-1735
FRANK KAVANAUGH, et al., )

Business Court

Defendants, )  

-and-

)  
  )  
FORCE PROTECTION, INC., )  
  )  
Nominal Defendant. )  

   
     

   
BARBARA A. HUGHES, LUTHER F. )  
HUGHES, and CLAYTON REED, )  
Derivatively on Behalf of FORCE )  
PROTECTION, INC., )  
Plaintiffs, )  
v. )  
  )

Civil Action No. 08-CP-10-2444

MICHAEL MOODY, et al., )

Business Court

  )  
Defendants, )  
and )  
  )  
FORCE PROTECTION, INC., )  
  )  
Nominal Defendant. )  

   


ORDER GRANTING DEFENDANTS’ MOTIONS FOR SUMMARY JUDGMENT



   
ANTHONY VITALE, Derivatively on )  
Behalf of Nominal Defendant FORCE )  
PROTECTION, Inc.,  )  
  )  
Plaintiff, )  
v. )  
  )  
GORDON MCGILTON, et al., ) Civil Action No. 09-CP-10-2216
  ) Business Court
Defendants, )  
and )  
  )  
FORCE PROTECTION, INC., )  
  )  
Nominal Defendant. )  

   

ORDER GRANTING DEFENDANTS’ MOTIONS FOR SUMMARY JUDGMENT

This matter comes before the Court on Defendants’ Motion for Summary Judgment filed on January 11, 2012; Defendants’ Supplemental Motion for Summary Judgment filed on April 20, 2012; Defendants’ Supplemental Memorandum of Law in Support of Their Motions for Summary Judgment filed on November 21, 2012 (collectively, the “Motions”); and all papers filed by the parties in connection therewith.

The Motions seek entry of summary judgment in the above-captioned cases for basically two reasons.  First, Defendants argue that Plaintiffs no longer have standing to continue prosecuting the shareholder derivative claims asserted in these cases because Plaintiffs no longer own stock in Force Protection Inc. (“Force Protection” or the “Company”), all shares of the Company’s stock having been acquired for cash by General Dynamics Corporation (“General Dynamics”) in a merger transaction that closed in December 2011 (the “Merger”).  Second, Defendants argue that summary judgment should be entered in these cases pursuant to the Full Faith and Credit Clause of the United States Constitution based on the preclusive effects of summary judgment orders entered by a Nevada state court and the United States District Court for the District of South Carolina in parallel actions asserting derivative claims on behalf of Force Protection that are substantively identical to the derivative claims asserted in the cases before this Court.

Having reviewed the papers submitted by the parties in connection with the Motions, the record evidence presented therein, and the arguments made by counsel at the two hearings the Court has held on the Motions (on May 1, 2012 and January 8, 2013), this Court finds that Defendants are entitled to summary judgment and hereby orders, for the reasons stated herein, that Defendants’ Motions are GRANTED.

I. Factual and Procedural Background

A. The Derivative Claims

The first of the complaints in these consolidated shareholder derivative actions was filed on March 27, 2008.  All three complaints assert claims derivatively on behalf of Force Protection, alleging breaches of fiduciary duties and other wrongful conduct by certain of the Company’s former directors and officers arising out of events that allegedly transpired between 2006 and 2008.

Parallel complaints alleging derivative claims on behalf of Force Protection substantively identical to those asserted in the actions before this Court were filed in the United States District Court for the District of South Carolina, styled Green v. Kavanaugh, et al., Civ. A. No. 2:08-CV-1904-CWH; Galbraith v. Kavanaugh, et al., Civ. A. No. 2:08-CV-1907-CWH; Cinotto v. Kavanaugh, et al., Civ. A. No. 2:08-CV-1998-CWH; and Luu v. Kavanaugh, et al., Civ. A. No. 2:08-CV-2019-CWH (those actions were later consolidated and are referred to herein, collectively, as the “Federal Action”).  Another complaint alleging parallel derivative claims on behalf of Force Protection substantively identical to those asserted in the actions before this Court and in the Federal Action was filed in the First Judicial District Court of the State of Nevada in and for Carson City, styled Saulle v. Kavanaugh, et al., Case No. 10-OC-00442-1B (the “Nevada Action”).

B. The Merger

In December 2011, while these shareholder derivative actions remained pending, General Dynamics acquired all outstanding shares of Force Protection’s common stock, including any that the Plaintiffs here may have held, in the Merger transaction.  The Merger closed on December 19, 2011, and, by that date, General Dynamics had acquired all outstanding shares of Force Protection’s common stock.  Accordingly, Plaintiffs concede that they no longer own Force Protection stock.

C. Defendants’ January 11, 2012 and April 20, 2012 Motions

In their Motion for Summary Judgment filed on January 11, 2012, Defendants argued that following the closing of the Merger on December 19, 2011, Plaintiffs no longer owned Force Protection stock and therefore lacked standing to continue prosecuting their derivative claims pursuant to the “continuous ownership rule,” which provides that continued stock ownership is required in order for a plaintiff to have standing to prosecute and maintain derivative claims.1  Defendants filed substantively identical motions for summary judgment in the Nevada Action and the Federal Action.

On March 2, 2012, Judge James T. Russell entered an order granting defendants’ motion for summary judgment in the Nevada Action.  Judge Russell’s order held, among other things, that because the derivative plaintiff in the Nevada Action no longer owned Force Protection stock following the Merger, the plaintiff therefore did not satisfy the continuous ownership rule and, thus, lacked standing to continue prosecuting his derivative claims on behalf of Force Protection.

The plaintiff in the Nevada Action had argued that, before summary judgment could be entered against him, he should be permitted to take further discovery to attempt to uncover evidence that might support the application of a narrow exception to the continuous ownership rule that some Delaware courts, but no Nevada court, had held may apply when a shareholder’s stock ownership is eliminated by a transaction that was fraudulent and effectuated merely for the purpose of eliminating derivative plaintiffs’ standing.  Judge Russell rejected the plaintiff’s argument.  He held that the factual record before him (developed in part through discovery in a separate lawsuit challenging the Merger, in which discovery the plaintiff in the Nevada Action, and counsel for the Plaintiffs here, had participated) showed that there was no genuine dispute of fact that the Merger had not been approved merely to deprive the derivative plaintiffs of standing.  Accordingly, Judge Russell held that, even if Nevada were to adopt Delaware’s so-called “fraud” exception to the continuous ownership rule, that exception would not apply on the record before him.

The plaintiff in the Nevada Action appealed the summary judgment order in that case, and that appeal remains pending as of the time of this Court’s Order.

On March 30, 2012, United States District Judge C. Weston Houck entered an order granting defendants’ motion for summary judgment in the Federal Action.  Applying the continuous ownership rule, Judge Houck held that the plaintiffs in that case, who also owned no Force Protection stock after the closing of the Merger on December 19, 2011, lacked standing to continue prosecuting their derivative claims.  The plaintiffs in the Federal Action did not appeal the order entering summary judgment against them, and hence that judgment is final.

On April 20, 2012, Defendants filed their Supplemental Motion for Summary Judgment.  Therein, Defendants argued that this Court is bound to give preclusive effect to the summary judgment orders issued by Judges Russell and Houck in the parallel and substantively identical Nevada Action and Federal Action.

On April 26, 2012, Plaintiffs filed their Memorandum of Law in Opposition to Defendants’ Motion for Summary Judgment and Request for Relief Pursuant to Rule 56(f) of the South Carolina Rules of Civil Procedure (“First Opposition Brief”).  In their First Opposition Brief, Plaintiffs argued that (i) prior to entry of summary judgment against them, they should be permitted to take certain specified discovery to attempt to establish the application of the “fraud” exception to the continuous ownership rule, recognized by some Delaware Courts but not by Nevada Courts, and (ii) that the Court should not give preclusive effect to the summary judgment orders issued in the Nevada Action and the Federal Action.

On May 1, 2012, this Court held a hearing on Defendants’ January 11 and April 20, 2012 Motions.  After considering the parties’ filings and counsel’s arguments, the Court decided to defer ruling on Defendants’ Motions.  The Court granted Plaintiffs’ Rule 56(f) discovery request and instructed the parties to complete that discovery, after which, if appropriate, the parties could submit additional briefs pertaining to the Motions.

D. The Rule 56(f) Discovery and Subsequent Proceedings

Pursuant to Plaintiffs’ Rule 56(f) request, Defendants produced certain documents requested by Plaintiffs in addition to the documents that had previously been produced to Plaintiffs, and Plaintiffs deposed four of the former Force Protection directors who approved the Merger.  Each of the four former directors (one of whom was not a Defendant in any of the derivative actions) testified at deposition that he or she approved the Merger for numerous business reasons having nothing to do with the derivative litigation and not to eliminate the derivative plaintiffs’ standing to continue prosecuting their derivative claims.

Following the completion of Plaintiffs’ requested discovery, Defendants filed their Supplemental Memorandum of Law in Support of Their Motions for Summary Judgment on November 21, 2012.  Plaintiffs filed a further Memorandum of Law in Opposition to Defendants’ Motion for Summary Judgment on January 7, 2013.

On January 8, 2013, the Court held a further hearing on the Motions.  At the January 8, 2013 hearing, Plaintiffs conceded that they had uncovered no evidence that might support the application of the “fraud” exception to the continuous ownership rule and that they had abandoned their reliance on that exception as a basis for opposing entry of summary judgment against them.  Instead, Plaintiffs argued, as they had for the first time in their brief filed the afternoon before the January 8, 2013 hearing, that:  (i) the question of Plaintiffs’ standing to continue prosecuting their derivative claims is a procedural matter governed by South Carolina law; and (ii) that the Court should find, at least in this case, that South Carolina law would not impose a continuous ownership requirement for Plaintiffs to have standing to continue prosecuting their derivative claims on behalf of Force Protection.

II. Findings of Fact

This Court finds, based on the factual record before it, that there is no genuine dispute as to the following material facts:

(1) Force Protection was incorporated under the laws of the State of Nevada.

(2) None of the Plaintiffs continued to own Force Protection stock following the closing of the Merger on December 19, 2011.

(3) Force Protection’s directors approved the Merger for various business reasons having nothing to do with the derivative litigation.  Those reasons are summarized in the Company’s public filings with the United States Securities and Exchange Commission that concern the Merger and are set forth in the declarations and depositions of various former members of Force Protection’s board of directors that are part of the record before this Court.

(4) The Merger was not approved merely to eliminate the derivative plaintiffs’ standing to continue prosecuting their derivative claims.

III. Conclusions of Law

In connection with this order, this Court makes the following conclusions of law:

(1) Plaintiffs’ standing to continue prosecuting the shareholder derivative claims asserted in their complaints is a dispositive threshold legal issue in this case.  If Plaintiffs lack standing under applicable law, then Defendants are entitled to entry of summary judgment in their favor.

(2) A plaintiff’s standing to assert claims belonging to a company derivatively on that company’s behalf is a matter subject to the corporate “internal affairs doctrine” and, as such, must be evaluated under the law of the jurisdiction in which the company was incorporated.  See Kamen v. Kemper Fin. Services, 500 U.S. 90, 96-97, 108-09 (1991); Menezes v. WL Ross & Co. LLC, 392 S.C. 584, 590, 709 S.E.2d 114, 117 (S.C. Ct. App. 2011) (“Generally, the rights and obligations of stockholders, including the relative rights of stockholders as respects the corporation itself, are determined and controlled by the law of the state of incorporation.”).

(3) Under Nevada law, a shareholder derivative action may be maintained only by a representative plaintiff who “owned stock in the corporation ‘at the time of the transaction of which he complains’ and throughout the pendency of the suit.”  Keever v. Jewelry Mountain Mines, Inc., 100 Nev. 576, 577, 688 P.2d 317, 317 (1984) (citations omitted); see also Cohen v. Mirage Resorts, Inc., 119 Nev. 1, 19, 62 P.3d 720, 732 (2003) (“A derivative claim is one brought by a shareholder on behalf of the corporation to recover for harm done to the corporation.  Because a derivative claim is brought on behalf of the corporation, a former shareholder does not have standing to assert a derivative claim.”) (citations omitted).

(4) To the extent that South Carolina law is relevant to the question of Plaintiffs’ standing, this Court concludes that South Carolina would impose the “continuous ownership rule,” which is the law in Nevada, Delaware, the federal courts, and is the overwhelming majority rule.

(5) The so-called “fraud” exception to the continuous ownership rule, as articulated by the Delaware courts that recognize the exception, applies only where shareholders’ ownership of stock is eliminated in a merger that was effectuated “merely” to eliminate derivative plaintiffs’ standing to initiate or maintain derivative claims on the company’s behalf.  See, e.g., Lewis v. Ward, 852 A.2d 896, 905 (Del. 2004); Lambrecht v. O’Neal, 3 A.3d 277, 284 n.20 (Del. 2010).

IV.  Analysis

Summary judgment is properly granted when “the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine dispute as to any material fact and that the moving party is entitled to judgment as a matter of law.”  Rule 56(c), SCRCP.  “The plain language of Rule 56(c), SCRCP, mandates the entry of summary judgment, after adequate time for discovery[,] against a party who fails to make a showing sufficient to establish the existence of an element essential to the party’s case and on which the party will bear the burden of proof at trial.”  Carolina Alliance for Fair Employment v. South Carolina Dept. of Labor, Licensing, and Regulation, 337 S.C. 476, 485, 523 S.E.2d 795, 800 (S.C. Ct. App. 1999) (affirming summary judgment against plaintiffs who lacked standing to pursue claims).  “A complete failure of proof concerning an essential element of the non-moving party’s case necessarily renders all other fact immaterial.”  Id.

I find that there is no genuine dispute of material fact that Plaintiffs lack standing to continue prosecuting the shareholder derivative claims asserted in the above-captioned cases.  As stated in the above Conclusions of Law, I find that the continuous ownership rule applies in this case under Nevada law, which I find governs Plaintiffs’ standing to continue prosecuting claims derivatively on behalf of Nevada corporation Force Protection.  I further find that, if South Carolina law were applicable to the question of Plaintiffs’ standing in this action, South Carolina law would also impose the continuous ownership rule.  Plaintiffs do not dispute that they no longer own Force Protection stock and therefore do not satisfy the continuous ownership rule.

In addition, Plaintiffs concede that, after discovery, they can point to no evidence supporting the application of the “fraud” exception and therefore have abandoned their assertion that they may continue prosecuting their claims pursuant to the “fraud” exception.  I likewise find that the record in this case presents no genuine dispute of material fact that the “fraud” exception, if adopted by Nevada (or South Carolina if South Carolina procedural rules governed Plaintiffs’ standing to continue prosecuting claims derivatively on behalf of a Nevada corporation), would not apply in this case.  Each of the four former Force Protection directors Plaintiffs deposed testified that he or she approved the Merger for various business reasons and not to eliminate the derivative plaintiffs’ standing.  In addition to having expressly abandoned their argument that the “fraud” exception applies in this case, Plaintiffs came forward with no evidence to contradict that testimony or otherwise suggest that the Merger was approved by Force Protection’s board of directors merely to eliminate the derivative plaintiffs’ standing.  For all of those reasons, the “fraud” exception does not save Plaintiffs’ claims.  Instead, Plaintiffs’ lack of continued stock ownership deprives them of standing to maintain these derivative claims, and summary judgment must therefore be entered against Plaintiffs.

I also find that Defendants are entitled to summary judgment based on the preclusive effects of the summary judgment orders entered by Judges Russell and Houck in the Nevada Action and the Federal Action, respectively.  The applicable standards for giving preclusive effect to those orders are satisfied in this substantively identical derivative case that, like the Nevada Action and the Federal Action, is brought on behalf of and for the benefit of the same real party in interest – Force Protection.  Judges Russell and Houck each decided the same standing issue that is dispositive of Plaintiffs’ claims here as well, and this Court is bound to give those judges’ orders the preclusive effect to which they are entitled under applicable law.

V. Conclusion

Accordingly, IT IS HEREBY ORDERED, ADJUDGED AND DECREED, that Defendants’ Motions are granted and that SUMMARY JUDGMENT IS ENTERED IN DEFENDANTS’ FAVOR in each of the above-captioned cases.

This 17th day of January, 2013.

  ____________________________________
The Honorable Roger M. Young, Sr.

 

1  On October 6, 2010, Defendants filed a motion seeking summary judgment against Plaintiff The Estate of Jacqueline K. Stevenson (the “Estate”) only, based on evidence that the Estate had sold its shares of Force Protection stock years prior to the Merger’s closing, and therefore lacked standing under the continuous ownership rule.  The Estate responded to that motion not by arguing that the continuous ownership rule did not apply in determining whether the Estate had standing, but instead by filing a motion to substitute in a different entity in the Estate’s place.  The Merger and the present Order by this Court have mooted the Estate’s motion to substitute (because the entity the Estate sought to substitute likewise no longer owns Force Protection stock) and makes it unnecessary for the Court to rule upon Defendants’ October 6, 2010 motion for summary judgment.